Revision:Using the Supply and Demand Model

The interaction of demand and supply will determine the equilibrium in a market. An equilibrium is a situation where the price is such that the quantity that consumers wish to buy is exactly balanced by the quantity that firms wish to supply.

With excess demand, prices will tend to be pushed up, whereas with excess supply, producers have much stock which they want to get rid of, so prices will be low.

The Cross Price Elasticity of Demand tells us how responsive the demand of one good is to a change in the price of another good. For example, let's say that tea is good A and that coffee is good B. If the price of coffee were to fall by 10%, coffee would become more popular, and XED would tell us that tea and coffee are substitutes.

For substitutes, XED will be positive, and for complements it will be negative.